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Charitable Giving Rules Changed By Pension Act

Supporting charities is more complicated than it was years ago. In 2007, all cash donations, no matter how small, must be documented by a bank record or a written communication from the charity providing its name, the date, and the amount you gave.

This dictate is one of many provisions that dealt with philanthropy in the Pension Protection Act of 2006. (Charitable reform happened to be a key ingredient in this sweeping retirement savings law.) And it makes life a little more difficult for many charitably-inclined individuals. For instance, take the case of Helen, who’s accustomed to dropping cash in the collection plate at church and then claiming a tax deduction based on what she has contributed. Now, she may have to use a check, not cash. Or, because she is older than 70½ and has money in a traditional IRA, there is another option.

Normally, IRA owners who’ve passed that age must take annual, taxable withdrawals. (This requirement has been temporarily suspended for the 2009 tax year only.) But the pension act authorizes “qualified charitable distributions” of up to $100,000 that can go straight from an IRA to charity. Such distributions count toward your required withdrawals. Yet because they’re charitable contributions, they aren’t taxed. Under the old rules, a tax-payer who doesn’t itemize deductions received no tax benefit for charitable gifts. This tax break was set to expire after 2007, but has been extended through 2009 by the Emergency Economic Stabilization Act of 2008.

Itemizers can benefit, too. Dave and Clara routinely deduct medical and miscellaneous itemized expenses, but because their income exceeds IRS thresholds, the value of those deductions is reduced. Giving directly from their IRAs keeps their earnings down and enlarges their deductions. Dave and Clara may give $100,000 apiece.

Contributions must go directly from the IRA to the charity, with the account custodian transferring the money at the owner’s request. But the IRA can’t be a SEP or SIMPLE, and the money can’t go to a donor-advised fund or private foundation.

Another rule change affects individuals who rummage through their homes periodically looking for items to give away. The pension act says that to deduct donations of used clothing and household goods, the items now must be in at least “good condition” and have more than “minimal value”—inexact terms the law left undefined.

This rule went into effect on August 18, 2006. Used items worth more than $500 need not be in “good” condition if supported by an appraisal.

Large non-cash gifts are also under fire. It may now be easier to trigger an IRS penalty for over-valuing a donation—even if you rely on an appraisal, which is required for gifts larger than $5,000. Though there are several exceptions that would get you off the hook, if those don’t apply you’ll be penalized when the amount you claim turns out to be more than one-and-a-half times what the tax agency decides the gift is worth. Previously, you got in trouble only if the misstatement was at least double the value. And now appraisers, too, will be fined if they prepare an appraisal that supports a misstated valuation.

Who may conduct “qualified appraisals” is also subject to tougher strictures. An appraiser must have demonstrated experience and education in appraising the particular type of property involved, as well as a professional designation and member-ship in professional associations. And the appraiser must follow generally accepted rules, such as the Uniform Standards of Professional Appraisal Practice.

The rule changes regarding appraisals could affect taxpayers who want to take advantage of another pension act provision, which provides more generous tax breaks for conservation easements. An easement is a permanent restriction that protects a habitat or preserves land, open space, or historically significant structures.

For example, an owner might seek an easement that would forever prohibit development on his wooded 35-acre hillside parcel and its miles of views. Donating the easement to a conservation organization would provide the owner with a charitable income tax deduction because the restriction reduces the property’s market value.

Deductions for easements may be as much as 50% of income, or 100% for qualifying farmers and ranchers, and you can deduct anything exceeding those limits over the following 15 years subject to the same annual cap. Under the old law, you could deduct only 30% of income. This tax break originally expired after 2007, but has been extended through 2009.

Information provided does not constitute individual tax advice. You should consult your tax advisor regarding your individual situation.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.

©2018 Legend Financial Advisors, Inc.®. All rights reserved.